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Suppliers to other businesses should review standard terms for reasonableness

Suppliers selling to other businesses on their standard terms should review those terms to ensure they are reasonable, particularly if selling to smaller businesses with unequal bargaining power, following a recent ruling.

Under the Unfair Contract Terms Act 1977, businesses contracting with each other on one party’s standard terms of business can only exclude or restrict liability for breach of the contract to the extent the relevant contract term is reasonable. The 1977 Act sets out a (non-exhaustive) list of factors relevant in deciding whether a term is reasonable.

In this case, a company agreed to supply laminated sheets to a customer on the company’s standard terms of business. Those terms excluded or restricted liability in four different ways. The sheets were defective, although this was only discovered after they had been fitted.

When the defect was discovered, the customer claimed compensation for breach of contract. The company claimed that the exclusions and restrictions in its standard terms applied, so it was not liable to pay the customer the compensation claimed.

The court examined each set of exclusions or restrictions and decided none were reasonable; and the customer was entitled to full compensation. Some of the reasons were:

  • Exclusion of liability for the quality, or fitness for purposes, of the sheets was not mitigated by alternative warranties as to quality
  • There was unequal bargaining power – the company had a much higher turnover then the retailer – so there was limited scope for negotiation
  • The goods were standard, rather than made to the customer’s specific order, so there was no agreed specification
  • The three-day period given to the customer to inspect the goods and assess whether they were defective was too short in the circumstances, and the consequences of not doing so was too serious to be reasonable
  • Both parties knew that the sheets were to be bonded into panels, so that limiting liability to the cost of the sheets rather than the cost of replacing the final panels, and a blanket exclusion of liability for loss of profits, third party costs, etc, were both unreasonable

Operative date

  • Now

Recommendation

  • Suppliers selling to other businesses on their standard terms should review those terms to ensure they are reasonable, particularly where the supplier is selling to smaller businesses with unequal bargaining power

Case ref: Saint Gobain Building Distribution Limited (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Limited [2015] EWHC B7 (TCC)

13 November 2015

Jonathan Waters has over 12 years of experience advising businesses in relation to commercial disputes and how to avoid or resolve them. He has a particular interest in construction law and adjudication, and he is currently studying for an Msc in Construction Law & Dispute Resolution at King’s College. Before starting Helix Law, he was the partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. He has a degree in Business Administration and before qualifying as a solicitor he worked in industry and investment banking for over a decade.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]